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Deloitte’s Insights for C-suite executives and board members provide information and resources to help address the challenges of managing risk for both value creation and protection, as well as increasing compliance requirements.

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Managing Human Capital Risks: Whose Responsibility Is It?

Because people touch the many aspects of an organization, a focus on human capital risk is a very important part of an effective risk management and compliance program. “Yet it is also because of this ‘human factor’—the complex involvement of people in the many aspects of the business—that ownership of human capital risk management can end up ill defined,” says Michael Fuchs, principal, Deloitte Consulting LLP. In fact, many organizations today face major challenges in this area due to a lack of clarity around roles and responsibilities assigned to human capital risk management.

Whether the risk and compliance challenges are those directly related to running a Human Resource (HR) organization (e.g., legal requirements of ERISA, FLSA and ADEA regulations) or some of the more strategic risk and compliance issues that have human capital at their core (e.g., designing talent strategies, aligning rewards, promoting fraud prevention and ethical behavior), sorting out who specifically is responsible for identifying, assessing, prioritizing, managing and monitoring those risks is no easy task.

Some argue that HR leaders, who have specialized personnel-related knowledge and capabilities, should assume ownership of people-related risk management. Others maintain that risk and compliance professionals, due to their strong regulatory knowledge and capabilities, should play the dominant role in human capital risk management. While still others believe that the strategic-level risks are the responsibility of the organization’s business leaders.

“In reality, parties on the various sides of the issues are correct,” notes Mr. Fuchs. Effective human capital risk management is the shared responsibility of HR, risk and compliance functions and senior business leaders. It is a cooperative effort combining deep experience in human capital, risk management and compliance, and business strategy and operations.

By working together, HR, risk and compliance and business leaders can bring their cumulative knowledge and strengths to efficiently create, manage and monitor a risk management plan, thereby minimizing people-related failures and maximizing people-related strategic opportunities. Ultimately, effective management of human capital risk—whether the upside risks associated with a growth and global expansion strategy, or the downside risks driven by unclear or reckless decision-making, fraud or talent lost due to poorly designed rewards programs—comes down to intelligent collaboration and cooperation across the organization.

HR professionals are equipped with an understanding of people issues, the HR regulatory environment, personnel data, future trends and competitive demands related to recruiting, retaining, managing, developing, compensating and rewarding employees. Risk, compliance and legal professionals bring the skills and knowledge necessary to help design a strong HR compliance and risk management program. Additionally, the role of the risk and compliance teams across the broader enterprise can help see to it that the HR risk management program aligns with company strategy and integrates well with organizational structure and other risk-monitoring functions. Risk and compliance professionals also bring a built-in familiarity with the latest risk assessment, monitoring and mitigation tools and techniques.

Following are six ways compliance and HR functions can work together to elevate people-related risks to the top of the corporate agenda:

1. Collaborate with the traditional risk management functions—Internal risk audits can be used as an opportunity for obtaining useful feedback and opportunities for improvements. Risk and compliance professionals can help HR management understand how these systems and processes work, how they can be adapted to talent issues, and how insights gleaned from them can be used to improve HR risk management.

2. Encourage Chief Human Resource Officers (CHROs) to prepare for the broader discussion of risk—The importance of the role of people and HR in an organization’s business strategy cannot be ignored. In order to identify a company’s top human capital risks it is important for CHROs to be engaged in the process, working with risk and compliance professionals, along with business leaders, to get a full picture of an organization’s strategic or operational risks. The information obtained can be used to develop a formal HR risk assessment and a benchmarking program to shed light on evolving risks and to explore leading practices of other companies dealing with similar issues.

3. Make the most of existing data—HR has a wealth of data that can help a company manage risk more effectively. Advanced analytics can provide deep insights about current risks and projections about future risks. Turnover data, for example, when combined with other information, may raise a red flag about hidden risks such as incompetent management or fraud.

4. Create a risk mindset in the HR function—Risk management should be an integral part of HR’s operating processes. Typically, there are two sets of documentation for HR processes: one for day-to-day operations and another that is used to demonstrate risk and compliance controls. Integrating the risk and compliance controls into the overall HR process can advance the risk agenda in HR, increasing the focus of everyone working in HR on the role of risk management in supporting both HR and company goals.

5. Get a seat at the risk management table—True cooperation between risk/compliance professionals and HR generally requires HR leaders to be directly involved with other top business leaders in the risk management process. HR leaders can help put the right human capital issues on the risk management agenda.

6. Understand the impact of HR changes on the company’s risk management program—Many changes to the business have risk implications. When undergoing a change in the HR function, whether it is implementing a new system or changing to a global service delivery model, the risk and compliance implications should be assessed, documented and discussed with the risk and compliance teams to integrate the change into the overall risk management program.

Risk and compliance professionals have long realized that risk management is not limited to the formal monitoring functions of the organization—and, increasingly, HR professionals are coming to the same conclusion. Company stability and effectiveness necessitate risk awareness and controls throughout the many areas of the organization—including, if not starting with, people-related activities. “One has to look no further than business news headlines to understand that managing people risk is about supporting an organization’s strategic intent and day-to-day oversight of specific compliance initiatives and regulations,” adds Mr. Fuchs. Either, or both, type of risk management can help build or diminish an organization. Risk managers and HR executives can find that working together with a common goal is an effective way to address the challenges of the human factor in a dynamic workplace.